The world is filled with misconceptions and so-called facts that simply are not true. One particularly persistent and pernicious fallacy is that Scandinavian countries (particularly Sweden) are "socialist". "Pernicious", because an offshoot of this fallacy is the belief that pure socialism - a demonstrably destructive and unsustainable system could still be successfully implemented based on "the Scandinavian experience".
The simple truth is that Scandinavia has not been socialist since the 1990's and could not even be correctly classified as socialist since the late 1970's. In fact, for many years, all of the Scandinavian countries (Finland, Sweden, Denmark and Norway) have consistently been listed among the top 25 most economically free countries. If anything, they are a prime example of the success of free markets the very opposite of socialism.
Determining whether a country is "socialist" meaning that government takes control of economic affairs is not a simple yes-or-no question. A country could have a lot of government control over imports and exports, but very little over internal economic affairs (Japan). It could tax its citizens at high rates, but leave them otherwise free to do as they please (Denmark). It could strictly regulate the labour market, but leave its borders open for free international trade (Sweden).
For these countries, a pure "socialist" or "capitalist" label does not fit, because they, like all countries, have a mixed economy with varying levels of economic freedom and government control. Economic systems are measured on a scale stretched between the two extremes of central planning and free markets. All countries fit somewhere in-between these two extremes, leaning towards one side or the other at any given time.
To measure the levels of economic freedom in the world, there are two main indexes; The Heritage Foundation, using ten criteria in its index, and the Fraser Institute, using 46 similar, but more detailed criteria. Criteria used in both indexes are taxation and the size of government as a percentage of GDP; labour legislation; restrictions on banking and foreign currency movements and international trade barriers (such as import tariffs). Both indexes look at the "rule of law" and the enforcement of property rights, as well as how much red tape is involved in starting up a new business.
The two indexes usefully come to very similar conclusions. Sweden, Denmark, Finland and Norway are consistently in the top 25 most "capitalist" countries despite their high tax rates (which seems to be the root cause of the Scandinavian socialism fallacy). Although these countries score poorly on taxation, they are far ahead of everyone else in just about every other measure of economic freedom, which increases their total score and puts them at the top of the economic freedom indexes.
In the 2007 index from the Fraser Institute, Sweden and Japan are placed joint 22nd. Sweden may have a higher tax rate than Japan, but Japan is rated 186th most restrictive in foreign trade. That's worse than most African countries! Sweden is so open to foreign trade that more than two thirds of its economy consists of dealings with other countries. So much so, that recently the EU had no bargaining power with Sweden there simply were no trade barriers to reduce in exchange for anything. As mentioned in a paper, recently, is it just a coincidental translation issue that most countries have a "minister
of trade", while Sweden has a "minister
for trade"? When Sweden taxes its citizens a few percentage points more than the Japanese, people assume Sweden to be socialist and Japan to be capitalist. What they do not recognise is that Japan has a collection of other socialist-like things other than taxation which Sweden does not, and similarly Denmark, Finland and Norway, which makes Scandinavia about as economically unrestricted as it gets.
That does not mean, however, that taxation is unimportant. In this particular case it happens to be of less importance because of
everything else the Scandinavians do. Ireland, for example, went from being one of the worst places to live at the end of the 1970's to currently one of the best. This was mainly because of the drop in unemployment from more than 20% to about 3% in just over a decade and the almost perfectly correlated drop in tax rates over the same period. Low taxation is important, but a country can get away with higher taxation if it is economically free in everything else particularly international trade.
The great news for us is that Ireland, in 1980, was at the point of economic development where South Africa is now. Sweden was at that point in the 1960's. If we open up our economy right now by lowering taxes, freeing the market and reducing restrictions on trade, within two or three decades we can be where Ireland and Sweden are now.
China, which is rated just below the middle of both freedom indexes (and is thus nowhere near socialist), caught on to these ideas about ten years ago... and just look at them now!
Author: Stephen van Jaarsveldt is a project manager and director of Project 59. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the authors and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 23 March 2010
References: Fraser Institute:
http://www.freetheworld.com/ and Heritage Foundation:
http://www.heritage.org/research/features/index/